An article by Rotfleisch & Samulovitch P.C. (Canadian Tax Law Firm Complete Guide To CRA T1135 Forms, by David Rotfleisch) discussed a variety of issues related to the T1135 form, including the following:
• Specified foreign property (SFP; defined in Subsection 233.3(1)) may include copyrights and patents, insurance policies, precious metals and futures contracts, in addition to assets more commonly considered.
• Shares of a Canadian corporation listed on a foreign stock exchange, paying dividends in a foreign currency, are not SFP.
• Shares of a Canadian corporation held in a foreign brokerage account are SFP.
• Shares of a foreign corporation listed on a Canadian stock exchange are SFP.
• The cost amount of depreciable property changes over time.
• American Depository Receipts (ADRs) trade in the U.S. but represent shares of non-U.S. corporations, making determination of the country to disclose challenging.
The article also discussed property not required to be reported, filling out the form, filing deadlines, and penalties for failure to file and for errors.
SERVICES TO A FOREIGN GOVERNMENT
In a May 15, 2017 French Technical Interpretation (2016-0645891E5, Grégoire, Sylvain), CRA opined that they do not generally consider health services provided to the general public to constitute services to the government. As such, a retirement pension received under a Swiss canton’s pension plan, in respect of nursing services provided to the general public, would not be exempt under the Canada-Switzerland Tax Treaty.
Comments- Although the specific question related to the Income Tax Treaty with Switzerland, many Treaties provide special exemptions for income derived from services to one of the two nations’ governments (including the Treaties with the United States (Article XIX) and the United Kingdom (Article 18), and the Model Convention of the Organisation for Economic Co-operation and Development (OECD; Article 19)).
PROPERTY FORECLOSED FROM A NON-RESIDENT
In a June 20, 2017 Supreme Court of British Columbia case (Scotia Mortgage Corporation vs. Gladu, Docket H22861, 2017 BCSC 1182), the holder of a mortgage on Canadian real estate owned by a nonresident asked the Court to declare that the purchasers of three foreclosed properties did not acquire the properties from a nonresident person. The case indicates this was for purposes of Section 116 of the Income Tax Act.
The Court held that it was effectively being asked to rule that the purchasers were not required to withhold and remit a portion of the purchase price (25% of proceeds by default) in accordance with Section 116, as is normally required where Canadian real estate is purchased from a non-resident. Jurisdiction over income tax matters rests with the Tax Court of Canada. The Court held that it lacked jurisdiction to rule in this matter or, to the extent it had jurisdiction, declined to rule in favour of the Tax Court.
Presumably, neither the purchasers of the property nor the mortgage holders wanted to be at risk of a later assessment for taxes which should have been withheld. An Advance Tax Ruling might be considered for such a situation.
SALE OF U.S. LIMITED PARTNERSHIP (LP) INTEREST
In the August edition of Canadian Tax Highlights (No Tax on Sale of US LP Units, Thomas W. Nelson, Hodgson Russ LLP, Buffalo), the U.S. taxationon the disposition of an interest in a LP by a foreign entity was discussed in the context of a recent U.S. Tax Court case (Grecian Magnesite Mining, Industrial & Shipping Co., SA v. Commissioner, July 13, 2017).
The U.S. Tax Court determined that such dispositions should be treated on an entity basis (the sale of a single asset, being the LP interest) rather than an underlying asset basis (the sale of the LP’s assets). In addition, the Court opined that the gains on such a sale constituted non-effectively connected income (which is exempt from U.S. tax).
In other words, the Court found that the gains from the disposition of an interest in an LP by a foreign entity would be exempt from U.S. taxation.
This decision is contrary to the IRS’ long-standing position (Revenue Ruling 91-32) which held the contrary. The article noted, however, that such precedence may not be applicable where a significant amount of the partnership’s assets include real property (where the Foreign Investment in Real Property Tax Act, FIRPTA, regulations override the non-tax treatment). The author of the above article noted that this case is likely to be appealed.
U.S. PARTNERSHIPS LATE FILING – SOME IRS RELIEF
For calendar year partnerships, the due date for filing the partnership’s tax return to the IRS in 2016 was changed to March 15from April 15. Many partnerships filed their returns by the former April 15 deadline and, if not for the change, would have filed their returns on time.Due to the change, they were late.
On September 1, 2017, the IRS released IR-2017-141 which provided relief for these partnerships where, essentially, the returns were filed with the IRS and furnished copies provided to the recipients by the date that would have been timely in prior years (April 15), or a request for an extension of time was filed by the April 15thdate. Taxpayers who qualified for this relief will not be considered to have received a first -time abatement under IRS’s administrative penalty waiver program.
Partnerships that have already been assessed a penalty but qualify for relief should be receiving a letter in the coming months notifying them of the relief.
SALE OF A CANADIAN PROPERTY BY A U.S. PERSON
An article in the August edition of Canadian Tax Highlights (US Citizens Living in Canada: Foreign-Currency Gain, Roy Berg of Moody’s LLP and Alexey Manasuev of US Tax IQ) reminded practitioners that, while the gain on a principal residence by a Canadian resident may be exempt from tax, other tax consequences may exist for U.S. taxpayers.
The U.S. allows an individual to exclude up to US$250,000 from the sale or exchange of their principal residence from gross income. Gains in excess of this may be subject to U.S. tax.
Also, foreign currency exchange gains or losses on the disposition of the property, as well as the mortgage repayment, must be considered. For example, consider a property that was acquired for CAD$1 million when the Canadian and U.S. dollar were at par but sold for CAD$1.1 million when the Canadian dollar had weakened to $0.75 on the U.S. dollar. A CAD$800,000 mortgage is acquired on the property.
For U.S. tax purposes, a capital loss of $175,000 (($1.1M x 0.75) – ($1M x 1)) is experienced. The repayment of the mortgage is subject to a $200,000 foreign exchange gain (($800,000 x 1) – ($800,000 x 0.75)).While the taxpayer is not subject to tax on the sale (due to the loss position), they are subject to tax on the foreign exchange gain on the mortgage repayment.
With the weakening in the value of the Canadian dollar against the U.S. dollar, a U.S. citizen selling his residence in Canada may experience a large U.S. loss.